Financial Crisis Probe Widens? “This is where all the bodies are buried”

In General Interest by Jonathan Tasini0 Comments

    I’ve maintained for a long time that the civil fines levied against Goldman Sachs ($550 million) and J.P. Morgan ($153 million) for their roles in the financial crisis scam amounted to peanuts–costs that will be ultimately passed on to consumers and shareholders. If a financial executive could aid and abet a massive fraud and get away with his company bearing the cost while he got paid tens of millions of dollars AND kept his job after the fraud cratered the economy, he would say, "where can I sign up?". Nothing will change their behavior unless high level executives get long jail sentences. And there is some hope here–albeit, modest.

   It appears as if California is not ready to sweep the whole scandal under the rug:

California is considering joining New York and Delaware in a wide-ranging investigation into Wall Street’s role in the mortgage meltdown that could lead to criminal charges against financial executives.

California Atty. Gen. Kamala Harris met with New York Atty. Gen. Eric Schneiderman on Thursday in San Francisco to discuss cooperating on the investigation, which is already one of the broadest to probe how banks encouraged the financial crisis through the creation of risky financial instruments backed by mortgages.

   Putting California’s muscle behind the investigation will be huge–and the state got hit hard by the scam:

California would represent a vital addition to the investigation because it was the location of a vast number of the mortgages and foreclosures that fed into the crisis. Since home prices peaked in 2007, California homeowners have lost $1.9 trillion in home equity, according to an estimate by the research firm Moody’s Economy.com.

Harris told The Times: "California was disproportionately harmed by the mortgage crisis, and our homeowners badly need relief. We will critically evaluate every possible avenue of relief for Californians. If it will result in real accountability and real results, no option will be off the table."[emphasis added]

As an aside, here’s an example in which elections do have significant consequences–Harris defeated Republican Steve Cooley in 2010 in a close election. Anyone want to place any bets on what Cooley’s interest would have been, had he won the race, in prosecuting Wall Street? Didn’t think so.

   The importance of the investigation underway?

The lawyers in the attorney general offices in New York and Delaware are looking at the role that Wall Street played in the buildup to the crisis: allegedly inflating the demand for subprime loans and then packaging them into shoddy bonds that triggered the financial meltdown, people familiar with the matter said.

"This is where all the bodies are buried," said Charles Geisst, a former banker who now teaches at Manhattan College. "This is where you could see fraud on an institutional level."[emphasis added]

   That’s the key: this wasn’t some rogue group of traders. The scam was orchestrated and directed by very senior players in Wall Street firms–who have so far skated jail time AND still have their jobs.

    Underscore this point again: while millions of people are out of work and pension funds of millions more were battered by the financial collapse, the people responsible are working AND reaping huge pay. Obscene is too soft a word to use.

    I hold out very little hope that the Justice Department will go after Wall Street executives even though Sen. Carl Levin has urged action against Goldman Sachs and others based on the findings of Levin’s investigation. Levin was hampered, as was the Financial Crisis Inquiry Commission, because neither had the ability to bring charges against executives.

   The New York attorney general’s powers are to be feared, however:

Schneiderman’s office is particularly feared by bankers because the state has unusually broad laws that have allowed past holders of the office, including Eliot Spitzer, to pursue cases that slipped through the fingers of federal prosecutors.

"It’s a different ballgame when you are dealing with the New York A.G.," said Brad Bondi, a securities lawyer at Cadwalader, Wickersham & Taft.

One of the strengths of New York law is that, unlike under federal law, prosecutors can build a case without proving that fraud was intentional. Even with this easier standard, Douglas Elliott, a former banker who is now with the Brookings Institution, said Schneiderman and Biden will have a hard time securing the convictions for which the public has hungered.[emphasis added]

   Bottom line: institutions and organizations and leaders need to continue to encourage Schneiderman to pursue these cases and build the alliance with California. It may be our last hope for any modicum of justice:

    Wall Street executives do not fear public humiliation nor do they really care, at the end of the day, about regulatory change, though it might be annoying. They adapt–and find new ways to rob the people.

    But, threatening to take away their freedom for a long time–and their access to private jets, chalets in the South of France, expensive wine and cigars–will focus their minds.

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